Carrying trading and how JPY is holding the global economy together

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We’re seeing a lot of heavy-hitter investors switching to cash, and at the center of this sentiment shift is JPY.
Let’s explore JPY and carry trading for insights into trading the markets in the coming weeks.

What is carry trading?​

Carry trading is when traders borrow money in a currency with low interest rates, like the Japanese Yen (JPY), and invest it in higher-yielding assets. This strategy works well when there’s a significant difference between the interest rates of two countries.

Why JPY is central to carry trading​

The JPY has been a popular currency for carry trades because of Japan's long-standing low interest rates. Investors borrow in Yen at almost no cost and use that money to invest in assets elsewhere, where returns are much higher. This can include U.S. stocks, Mexican bonds, or even Japanese equities.

JPY’s role in global markets​

When traders use Yen to fund investments, it adds liquidity to the global markets. This helps to support asset prices and contributes to economic growth worldwide. However, this system can be quite delicate, depending heavily on the Bank of Japan (BOJ)’s interest rate policies.

BOJ policy and Its global impact​

Recently, a slight interest rate hike by the BOJ caused a significant move in the Yen, leading to the unwinding of many carry trades. This sell-off in global risk assets, including U.S. equities, shows just how crucial the JPY is in this trading strategy. Even a small change in Japanese rates can trigger widespread market reactions as traders rush to cover their positions.

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